Oliver's Insights - Australian house prices - overvalued but undersupplied

[PrimeCommercial]

Though this information might be on interest

Hi
This note looks at the outlook for Australian house prices. The key points are as follows:
Australian housing remains very expensive, but is supported by an undersupply. Worsening affordability is likely to constrain average house price growth to around 5% over the year ahead. Stronger at the upper end, but weaker for low end housing.
Expensive housing and high household debt levels are a risk for the Australian economy but in the absence of higher unemployment, much higher interest rates or a big supply increase, a US style collapse in Australian house prices is unlikely. None seem likely in the short term.
The best outcome in terms of defusing both the issue of high household debt levels (most of which is housing debt) and poor affordability would be to have a several years of average house price growth running below growth in household income.

Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital Investors

 

[Ausprop]

expensive compared to what? I may think the price of eggs is expensive but the price is the price

 

[alexlee]

Yes, it would be interesting to see the real prices of, say, eggs, meat, maccas, cars, computers, etc. My guess would be they're all over the place. Cars, for example, have gone down in price in real terms. Certainly, I think things are expensive when I shop at the supermarket. But does that mean the price of milk, say, will be cheaper next year?

 

[aussierogue]

I wonder how much they pay that economist for those pearls of wisdom. Not very insightful. It says the same thing on the back of my cornflakes packet.

 

[alexlee]

For example, if someone said 'the current boom is only due to the increased grant, and after that prices might be hit', then at least that makes sense. I don't necessarily agree with it, because you have to look at the wider economy, but at least I get the logic. A straight price to income ratio is too simplistic, since the number of people working, the mix (high / low income earners), what they have left after paying the bills, how cheap other things are, interest rates, etc. With all the changes (dual incomes, for example) I don't see how the ratio should, or can, stay constant.

If people 30 years ago generally paid 3 times their income when they were probably a single income household, when whitegoods and cars were relatively much more expensive, why should a family now on two incomes and relatively cheaper cars and whitegoods only be able to 'afford' a property 3 times their income?

 

[bespoke]

If people 30 years ago generally paid 3 times their income when they were probably a single income household, when whitegoods and cars were relatively much more expensive, why should a family now on two incomes and relatively cheaper cars and whitegoods only be able to 'afford' a property 3 times their income?

I remember my parents getting our first colour TV about 1974ish I was about 7 or 8 at the time. Mum has told me since that they had to get it on HP as it was so expensive. $1000 springs to mind but I am probably wrong about that. My mothers first microwave (c. 1982?) cost around $600 and you can get a similar size one now for $100 to $150.

 

[Token Funder]

For example, if someone said 'the current boom is only due to the increased grant, and after that prices might be hit', then at least that makes sense. I don't necessarily agree with it, because you have to look at the wider economy, but at least I get the logic. A straight price to income ratio is too simplistic, since the number of people working, the mix (high / low income earners), what they have left after paying the bills, how cheap other things are, interest rates, etc. With all the changes (dual incomes, for example) I don't see how the ratio should, or can, stay constant.

If people 30 years ago generally paid 3 times their income when they were probably a single income household, when whitegoods and cars were relatively much more expensive, why should a family now on two incomes and relatively cheaper cars and whitegoods only be able to 'afford' a property 3 times their income?

Worth reading the paper alexlee (based on your comments, I'm not sure you have).

There's nothing particularly controversial in the points Shane makes nor the conclusions he comes to based on those points.

 

[Paul Do]

Completely agree with Shane Oliver.

expensive compared to what? I may think the price of eggs is expensive but the price is the price

Compared to wages:

http://www.ibhb.com.au/resources/valuations.htm

 

[alexlee]

On that basis, property has been 'expensive' since 2000. I'm glad I didn't know about these statistics 10 years ago. The average family and how they spend has changed in the last 50 years, as have bank lending criteria.

 

[Ausprop]

Completely agree with Shane Oliver.


Compared to wages:

http://www.ibhb.com.au/views/Figure%204.7.gif

maybe it was cheap before? these are all value judgements and puffery